Construction PMI falls back into negative territory

4 Mar UK construction activity declined in February 2019 for first time in 11 months.

The latest monthly survey of construction purchasing managers indicates that business activity levels fell during February, ending a 10-month period of sustained expansion. The drop in construction work was led by reductions in commercial building and civil engineering activity. A soft patch for new orders so far in 2019 also meant that job creation remained subdued in February.

Survey respondents often cited concerns about a lack of new projects to replace completed contracts.

At 49.5 in February, down from 50.6 in January, the headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index (previously call the purchasing managers index or PMI) registered below the 50.0 no-change threshold for the first time since the snow disruptions that brought a slow-down March 2018. Aside from that brief weather-related decline in output, the latest reading was the lowest since September 2017.

Residential work was the best performing area of construction activity in February 2019, with growth recorded for the 13th consecutive month. However, the rate of expansion was only modest and not enough to offset the declines recorded for commercial and civil engineering activity. In both sectors, the pace of contraction was the steepest since March 2018. Anecdotal evidence from survey respondents suggested that Brexit uncertainty had slowed decision-making on commercial projects and led to subdued client demand. There were also reports that low transaction volumes and a general drop in confidence across the housing market had acted as a brake on residential building.

There was only a marginal overall rise in new work received by construction firms, with the latest index reading for new work the weakest since May 2018. Political uncertainty was widely cited as a factor contributing to a lack of invitations to tender, particularly on commercial projects.

Fragile order books and a renewed decline in construction output meant that employment growth remained much softer than seen in the final quarter of 2018. Among those companies reporting an increase in staffing numbers, there were some reports that extra trainees had been taken on to help alleviate skill shortages. However, other firms said that concerns about the business outlook had led them not to replace voluntary leavers.

The index measuring business expectations for the year ahead remained inside positive territory, but the degree of confidence eased to a four-month low and was well below the long-run survey average. Construction firms noted that delays to client decision-making had slowed progress of new project starts, which could create gaps in their future workloads.

Input buying fell for the first time since September 2017, reflecting softer demand. However, suppliers' delivery times lengthened to the greatest extent since last August. Some firms noted that stockpiling had led to longer wait-times for construction products and materials.

Input cost inflation meanwhile edged up since January, but was still at the second-lowest level since June 2016.

Tim Moore, economics associate director at IHS Markit, which compiles the survey, said: “The UK construction sector moved into decline during February as Brexit anxiety intensified and clients opted to delay decision-making on building projects. Risk aversion in the commercial sub-category has exerted a downward influence on workloads throughout the year so far. This reflects softer business spending on fixed assets such as industrial units, offices and retail space. The fall in commercial work therefore hints at a further slide in domestic business investment during the first quarter, continuing the declines seen in 2018.

“There were also reports that the more fragile housing market confidence has begun to act as a brake on residential work, which adds to signs that house building has lost momentum since the end of last year. This leaves the construction sector increasingly reliant on large-scale infrastructure projects for growth over the year ahead.

“Construction companies pared back their purchasing activity in response to subdued demand in February, but delivery delays for inputs were among the highest seen over the past four years. Survey respondents noted that stockpiling efforts by the UK manufacturing sector had an adverse impact on transport availability and supplier capacity across the construction supply chain.

“On a more positive note, input price inflation held close to January's two-and-a-half year low. The slowdown in cost pressures from the peaks seen in the first half of 2018 provides a signal that the worst phase has passed for supplier price hikes related to sterling depreciation."

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, which sponsors the monthly survey, said: “The recent fears over the Brexit-related impacts on the sector were realised this month, as barring the weather-related blip in March last year, construction put in its worst performance since September 2017, with the PMI contracting to just below the no-change mark. Commercial and civil engineering activity was pushed into the red, as client uncertainty over placing new orders left its mark. This meant the relatively weak residential building sector was the best performer. However, with consumer confidence also waning, housing is likely to follow suit in the coming months. The domino effect of stockpiling by other sectors such as manufacturing impacted on supplier performance, as builders competed for dwindling supplies of raw materials, while transportation availability also became a problem, leading to supply chain bottlenecks. This meant that purchasers were subjected to the second-longest delivery times since March 2015, affecting work already in-hand. On the upside, input price inflation was not as strong compared to the last couple of years and employment creation was modestly maintained in spite of some companies placing a freeze on any new hires. In short, the foundations of the construction sector are crumbling under the weight of Brexit and businesses are switching to survival mode until the way forward is cleared."